QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-04471

XEROX CORPORATION

(Exact Name of Registrant as specified in its charter)

_________________________________________________

New York

16-0468020

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

P.O. Box 4505, 45 Glover Avenue

Norwalk, Connecticut

06856-4505

(Address of principal executive offices)

(Zip Code)

(203) 968-3000

(Registrant’s telephone number, including area code)

_________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Class

Outstanding at June 30, 2012

Common Stock, $1 par value

1,307,202,831 shares

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and any exhibits to this Report may contain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. These statements reflect management’s current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially. These factors include but are not limited to: changes in economic conditions, political conditions, trade protection measures, licensing requirements, environmental regulations and tax matters in the United States and in the foreign countries in which we do business; changes in foreign currency exchange rates; actions of competitors; our ability to obtain adequate pricing for our products and services and to maintain and improve cost efficiency of operations, including savings from restructuring actions; the risk that unexpected costs will be incurred; our ability to expand equipment placements; the risk that subcontractors, software vendors and utility and network providers will not perform in a timely, quality manner; the risk that individually identifiable information of customers, clients and employees could be inadvertently disclosed or disclosed as a result of a breach of our security; our ability to recover capital investments; development of new products and services; our ability to protect our intellectual property rights; interest rates, cost of borrowing and access to credit markets; the risk that multi-year contracts with governmental entities could be terminated prior to the end of the contract term; reliance on third parties for manufacturing of products and provision of services; our ability to drive the expanded use of color in printing and copying; the outcome of litigation and regulatory proceedings to which we may be a party; and other risks that are set forth in the “Risk Factors” section, the “Legal Proceedings” section, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and other sections of this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 and our 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments, except as required by law.

For additional information about Xerox Corporation and access to our Annual Reports to Shareholders and SEC filings, free of charge, please visit our website at www.xerox.com/investor. Any information on or linked from the website is not incorporated by reference into this Form 10-Q.

We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the accounting policies described in our 2011 Annual Report to Shareholders, which is incorporated by reference in our 2011 Annual Report on Form 10-K (“2011 Annual Report”), and the interim reporting requirements of Form 10-Q. Accordingly, certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. You should read these Condensed Consolidated Financial Statements in conjunction with the Consolidated Financial Statements included in our 2011 Annual Report.

In our opinion, all adjustments which are necessary for a fair statement of financial position, operating results and cash flows for the interim periods presented have been made. These adjustments consist of normal recurring items. Interim results of operations are not necessarily indicative of the results of the full year.

For convenience and ease of reference, we refer to the financial statement caption “Income before Income Taxes and Equity Income” as “pre-tax income.”

Note 2 – Recent Accounting Pronouncements

Fair Value Accounting:In May 2011, the FASB issued ASU 2011-04, which amended Fair Value Measurements and Disclosures - Overall (ASC Topic 820-10) to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are consistent between U.S. GAAP and International Financial Reporting Standards. This update changed certain fair value measurement principles and enhanced the disclosure requirements, particularly for level 3 fair value measurements. We adopted this update prospectively effective for our fiscal year beginning January 1, 2012. This update did not have a material effect on our financial condition, results of operations or disclosures.

Balance Sheet Offsetting:In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the Balance Sheet and instruments and transactions subject to an agreement similar to a master netting arrangement to enable users of their financial statements to understand the effects of offsetting and related arrangements on their financial position. This update is effective for our fiscal year beginning January 1, 2013 and must be applied retrospectively. The principal impact from this update will be to expand disclosures regarding our financial instruments. We currently report our derivative assets and liabilities on a gross basis in the Balance Sheet even in those instances where offsetting may be allowed under a master netting agreement.

Note 3 – Segment Reporting

Our reportable segments are aligned with how we manage the business and view the markets we serve. We report our financial performance based on the following two primary reportable segments – Services and Technology. Our Services segment operations involve delivery of a broad range of services including business process, document and IT outsourcing. Our Technology segment includes the sale and support of a broad range of document systems from entry level to high-end.

The Services segment is comprised of three outsourcing service offerings:

•

Business Process Outsourcing ("BPO")

•

Document Outsourcing (which includes Managed Print Services) ("DO")

•

Information Technology Outsourcing ("ITO")

Business process outsourcing services include service arrangements where we manage a customer’s business activity or process. Document outsourcing services include service arrangements that allow customers to streamline, simplify and digitize document-intensive business processes through automation and deployment of software applications and tools and the management of their printing needs. Document outsourcing services also include revenues from our

Xerox 2012 Form 10-Q

7

partner print services offerings. Information technology outsourcing services include service arrangements where we manage a customer’s IT-related activities, such as application management and application development, data center operations or testing and quality assurance.

Our Technology segment is centered on strategic product groups, which share common technology, manufacturing and product platforms. This segment includes the sale of document systems and supplies, technical services and product financing. Our products range from:

•

“Entry,” which includes A4 devices and desktop printers; to

•

“Mid-range,” which includes A3 devices that generally serve workgroup environments in midsize to large enterprises and includes products that fall into the following market categories: Color 41+ ppm priced at less than $100K and Light Production 91+ ppm priced at less than $100K; to

•

“High-end,” which includes production printing and publishing systems that generally serve the graphic communications marketplace and large enterprises.

The segment classified as Other includes several units, none of which meet the thresholds for separate segment reporting. This group primarily includes Global Paper and Supplies Distribution Group (predominantly paper sales), licensing revenues, GIS network integration solutions and electronic presentation systems and non-allocated Corporate items including non-financing interest, as well as other items included in Other expenses, net.

Operating segment revenues and profitability were as follows:

Three Months EndedJune 30,

Six Months EndedJune 30,

Segment Revenue

Segment Profit (Loss)

Segment Revenue

Segment Profit (Loss)

2012

Services

$

2,806

$

298

$

5,627

$

561

Technology

2,370

268

4,708

513

Other

365

(68

)

709

(120

)

Total

$

5,541

$

498

$

11,044

$

954

2011

Services

$

2,672

$

322

$

5,256

$

588

Technology

2,552

300

5,047

566

Other

390

(73

)

776

(139

)

Total

$

5,614

$

549

$

11,079

$

1,015

Three Months EndedJune 30,

Six Months EndedJune 30,

Reconciliation to Pre-tax Income

2012

2011

2012

2011

Segment Profit

$

498

$

549

$

954

$

1,015

Reconciling items:

Restructuring and asset impairment charges

(29

)

9

(46

)

24

Restructuring charges of Fuji Xerox

(6

)

(4

)

(10

)

(15

)

Amortization of intangible assets

(82

)

(87

)

(164

)

(172

)

Equity in net income of unconsolidated affiliates

(31

)

(34

)

(71

)

(68

)

Loss on early extinguishment of liability

—

(33

)

—

(33

)

Other

1

1

1

—

Pre-tax Income

$

351

$

401

$

664

$

751

Note 4 – Acquisitions

In February 2012, we acquired R.K. Dixon, a leading provider of IT services, copiers, printers and managed print services for approximately $58. The acquisition furthers our coverage of central Illinois and eastern Iowa, building on

Xerox 2012 Form 10-Q

8

our strategy to create a nationwide network of locally-based companies focused on customers' needs to improve business performance through efficiencies.

R.K. Dixon is included within our Technology segment. Additionally, our Services segment acquired two businesses during the six months ended June 30, 2012 for a total of $29 in cash. The operating results of these acquisitions are not material to our financial statements and are included within our results from the respective acquisition dates. The purchase prices were primarily allocated to intangible assets and goodwill based on third-party valuations and management’s estimates.

Note 5 – Receivables, Net

Accounts Receivable Sales Arrangements

Accounts receivable sales arrangements are utilized in the normal course of business as part of our cash and liquidity management. We have facilities in the U.S., Canada and several countries in Europe that enable us to sell to third-parties, on an on-going basis, certain accounts receivable without recourse. The accounts receivables sold are generally short-term trade receivables with payment due dates of less than 60 days.

One of the facilities in the U.S. enables us to sell a designated pool of receivables on a revolving basis to a wholly-owned consolidated bankruptcy-remote limited purpose subsidiary, which in turn sells such receivables to third-party commercial paper conduit purchasers (collectively, the "Purchasers") for cash and a deferred purchase price receivable. The Purchasers' maximum cash investment in the receivables at any time is $265 and new receivables are purchased from cash collections on previously sold receivables. This facility terminates in June 2014. During the three and six months ended June 30, 2012, receivables of $474 and $566, respectively, were sold under this revolving facility program.

All of our arrangements involve the sale of entire groups of accounts receivables for cash. In most instances a portion of the sales proceeds are held back by the purchaser and payment is deferred until collection of the related receivables sold. Such holdbacks are not considered legal securities nor are they certificated. We report collections on such receivables as operating cash flows in the Condensed Consolidated Statements of Cash Flows because such receivables are the result of an operating activity and the associated interest rate risk is de minimis due to its short-term nature. Our risk of loss following the sales of accounts receivable is limited to the outstanding deferred purchase price receivable. These receivables are included in the caption “Other current assets” in the accompanying Condensed Consolidated Balance Sheets and were $244 and $97 at June 30, 2012 and December 31, 2011, respectively. The balance at June 30, 2012 includes receivables of $150 held by the bankruptcy-remote subsidiary, noted in the revolving arrangement above, which were not available to satisfy any of our creditor obligations.

Under most of the arrangements, we continue to service the sold accounts receivable. When applicable, a servicing liability is recorded for the estimated fair value of the servicing. The amounts associated with the servicing liability were not material.

Of the accounts receivable sold and derecognized from our Balance Sheet, $1,049 and $815 remained uncollected as of June 30, 2012 and December 31, 2011, respectively. Accounts receivables sales were as follows:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Accounts receivable sales

$

1,215

$

819

$

2,090

$

1,549

Deferred proceeds

256

103

403

197

Fees associated with sales

6

5

12

9

Estimated increase to operating cash flows(1)

169

29

100

5

____________________________

(1)

Represents the difference between current and prior period receivable sales adjusted for the effects of: (i) the deferred proceeds, (ii) collections prior to the end of the quarter and (iii) currency.

the allowance for credit losses on a country or geographic basis. Our policy and methodology used to establish our allowance for doubtful accounts has been consistently applied over all periods presented.

The following table is a rollforward of the allowance for doubtful finance receivables as well as the related investment in finance receivables:

United States

Canada

Europe

Other(3)

Total

Allowance for Credit Losses:

Balance at December 31, 2011

$

75

$

33

$

91

$

2

$

201

Provision

2

1

12

—

15

Charge-offs

(4

)

(3

)

(12

)

—

(19

)

Recoveries and other(1)

1

2

2

1

6

Balance at March 31, 2012

74

33

93

3

203

Provision

3

2

11

1

17

Charge-offs

(5

)

(4

)

(15

)

—

(24

)

Recoveries and other(1)

1

—

(6

)

(1

)

(6

)

Balance at June 30, 2012

$

73

$

31

$

83

$

3

$

190

Finance receivables as of June 30, 2012 collectively evaluated for impairment(2)

$

2,739

$

791

$

2,423

$

149

$

6,102

Allowance for Credit Losses:

Balance at December 31, 2010

$

91

$

37

$

81

$

3

$

212

Provision

7

4

11

—

22

Charge-offs

(10

)

(5

)

(8

)

—

(23

)

Recoveries and other(1)

(1

)

2

3

—

4

Balance at March 31, 2011

87

38

87

3

215

Provision

1

3

14

—

18

Charge-offs

(6

)

(5

)

(11

)

—

(22

)

Recoveries and other(1)

(1

)

—

(1

)

—

(2

)

Balance at June 30, 2011

$

81

$

36

$

89

$

3

$

209

Finance receivables as of June 30, 2011 collectively evaluated for impairment(2)

$

2,979

$

867

$

2,919

$

88

$

6,853

_____________________________

(1)

Includes the impacts of foreign currency translation and adjustments to reserves necessary to reflect events of non-payment such as customer accommodations and contract terminations.

(2)

Total Finance receivables exclude residual values of $4 and $9, and the allowance for credit losses of $190 and $209 at June 30, 2012 and 2011, respectively.

(3)

Includes developing market countries and smaller units.

We evaluate our customers based on the following credit quality indicators:

•

Investment grade: This rating includes accounts with excellent to good business credit, asset quality and the capacity to meet financial obligations. These customers are less susceptible to adverse effects due to shifts in economic conditions or changes in circumstance. The rating generally equates to a Standard & Poors (S&P) rating of BBB- or better. Loss rates in this category are normally minimal at less than 1%.

•

Non-investment grade: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. This rating generally equates to a BB S&P rating. Although we experience higher loss rates associated with this customer class, we believe the risk is somewhat mitigated by the fact that our leases are fairly well dispersed across a large and diverse customer base. In addition, the higher loss rates are largely offset by the higher rates of return we obtain on such leases. Loss rates in this category are generally in the range of 2% to 4%.

Xerox 2012 Form 10-Q

10

•

Substandard: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. We use numerous strategies to mitigate risk including higher rates of interest, prepayments, personal guarantees, etc. Accounts in this category include customers who were downgraded during the term of the lease from investment and non-investment grade status when the lease was originated. Accordingly, there is a distinct possibility for a loss of principal and interest or customer default. The loss rates in this category are around 10%.

Credit quality indicators are updated at least annually and the credit quality of any given customer can change during the life of the portfolio. Details about our finance receivables portfolio based on industry and credit quality indicators are as follows:

June 30, 2012

Investment

Grade

Non-investment

Grade

Substandard

Total Finance

Receivables

Finance and Other Services

$

352

$

340

$

123

$

815

Government and Education

747

17

2

766

Graphic Arts

103

159

195

457

Industrial

152

88

26

266

Healthcare

120

41

24

185

Other

98

96

56

250

Total United States

1,572

741

426

2,739

Finance and Other Services

148

109

45

302

Government and Education

116

9

4

129

Graphic Arts

37

37

31

105

Industrial

59

41

30

130

Other

74

40

11

125

Total Canada

434

236

121

791

France

237

324

88

649

U.K./Ireland

206

155

54

415

Central(1)

287

437

76

800

Southern(2)

165

250

52

467

Nordics(3)

52

37

3

92

Total Europe

947

1,203

273

2,423

Other

108

36

5

149

Total

$

3,061

$

2,216

$

825

$

6,102

December 31, 2011

Investment

Grade

Non-investment

Grade

Substandard

Total Finance

Receivables

Finance and Other Services

$

349

$

380

$

160

$

889

Government and Education

821

20

4

845

Graphic Arts

126

200

172

498

Industrial

180

83

32

295

Healthcare

130

42

28

200

Other

97

93

76

266

Total United States

1,703

818

472

2,993

Finance and Other Services

153

118

51

322

Government and Education

121

9

4

134

Graphic Arts

36

39

35

110

Industrial

56

41

34

131

Xerox 2012 Form 10-Q

11

Other

74

42

12

128

Total Canada

440

249

136

825

France

246

354

92

692

U.K./Ireland

201

162

54

417

Central(1)

330

494

57

881

Southern(2)

219

256

63

538

Nordics(3)

60

39

3

102

Total Europe

1,056

1,305

269

2,630

Other

75

26

7

108

Total

$

3,274

$

2,398

$

884

$

6,556

_____________________________

(1)

Switzerland, Germany, Austria, Belgium and Holland.

(2)

Italy, Greece, Spain and Portugal.

(3)

Sweden, Norway, Denmark and Finland.

Xerox 2012 Form 10-Q

12

The aging of our billed finance receivables is based upon the number of days an invoice is past due and is as follows:

June 30, 2012

Current

31-90

Days

Past Due

>90 Days

Past Due

Total Billed

Finance

Receivables

Unbilled

Finance

Receivables

Total

Finance

Receivables

Finance

Receivables

>90 Days

and

Accruing

Finance and Other Services

$

1

$

2

$

1

$

4

$

811

$

815

$

23

Government and Education

15

4

4

23

743

766

43

Graphic Arts

2

1

—

3

454

457

12

Industrial

1

1

—

2

264

266

11

Healthcare

1

1

—

2

183

185

10

Other

—

1

—

1

249

250

8

Total United States

20

10

5

35

2,704

2,739

107

Canada

5

3

1

9

782

791

22

France

2

1

—

3

646

649

10

U.K./Ireland

2

1

3

6

409

415

3

Central(1)

5

5

3

13

787

800

29

Southern(2)

28

5

8

41

426

467

79

Nordics(3)

1

—

—

1

91

92

—

Total Europe

38

12

14

64

2,359

2,423

121

Other

3

—

—

3

146

149

—

Total

$

66

$

25

$

20

$

111

$

5,991

$

6,102

$

250

December 31, 2011

Current

31-90

Days

Past Due

>90 Days

Past Due

Total Billed

Finance

Receivables

Unbilled

Finance

Receivables

Total

Finance

Receivables

Finance

Receivables

>90 Days

and

Accruing

Finance and Other Services

$

18

$

4

$

1

$

23

$

866

$

889

$

15

Government and Education

21

5

2

28

817

845

29

Graphic Arts

16

2

1

19

479

498

7

Industrial

7

2

1

10

285

295

6

Healthcare

5

2

—

7

193

200

5

Other

8

1

—

9

257

266

4

Total United States

75

16

5

96

2,897

2,993

66

Canada

3

2

1

6

819

825

27

France

1

1

1

3

689

692

16

U.K./Ireland

3

2

3

8

409

417

4

Central(1)

7

2

3

12

869

881

46

Southern(2)

31

4

13

48

490

538

82

Nordics(3)

1

—

—

1

101

102

—

Total Europe

43

9

20

72

2,558

2,630

148

Other

2

1

—

3

105

108

—

Total

$

123

$

28

$

26

$

177

$

6,379

$

6,556

$

241

_____________________________

(1)

Switzerland, Germany, Austria, Belgium and Holland.

(2)

Italy, Greece, Spain and Portugal.

(3)

Sweden, Norway, Denmark and Finland.

Xerox 2012 Form 10-Q

13

Note 6 – Inventories

The following is a summary of Inventories by major category:

June 30, 2012

December 31, 2011

Finished goods

$

902

$

866

Work-in-process

70

58

Raw materials

101

97

Total Inventories

$

1,073

$

1,021

Note 7 – Investment in Affiliates, at Equity

Our equity in net income of our unconsolidated affiliates was as follows:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Fuji Xerox

$

28

$

31

$

65

$

62

Other investments

3

3

6

6

Total Equity in Net Income of Unconsolidated Affiliates

$

31

$

34

$

71

$

68

Fuji Xerox

Equity in net income of Fuji Xerox is affected by certain adjustments required to reflect the deferral of profit associated with intercompany sales. These adjustments may result in recorded equity income that is different from that implied by our 25% ownership interest. Equity income for the six months ended June 30, 2012 and 2011 includes after-tax restructuring charges of $10 and $15, respectively, primarily reflecting Fuji Xerox’s continued cost-reduction initiatives.

Condensed financial data of Fuji Xerox was as follows:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Summary of Operations:

Revenues

$

3,064

$

2,852

$

6,394

$

5,944

Costs and expenses

2,856

2,645

5,940

5,542

Income before income taxes

208

207

454

402

Income tax expense

81

64

178

124

Net Income

127

143

276

278

Less: Net income – noncontrolling interests

1

1

2

2

Net Income – Fuji Xerox

$

126

$

142

$

274

$

276

Weighted Average Rate(1)

80.09

81.59

79.90

81.87

_____________________________

(1)

Represents Yen/U.S. Dollar exchange rate used to translate.

Note 8 – Restructuring Programs

During the six months ended June 30, 2012, we recorded net restructuring and asset impairment charges of $46, which included approximately $47 of severance costs related to headcount reductions of approximately 1,100 employees primarily in North America and $7 of lease cancellation and asset impairment charges. These costs were partially offset by $8 of net reversals for changes in estimated reserves from prior period initiatives.

Information related to restructuring program activity during the six months ended June 30, 2012 is outlined below:

Xerox 2012 Form 10-Q

14

Severance and

Related Costs

Lease Cancellation

and Other Costs

Asset Impairments(2)

Total

Balance December 31, 2011

$

116

$

7

$

—

$

123

Restructuring provision

47

5

2

54

Reversals of prior accruals

(8

)

—

—

(8

)

Net current period charges(1)

39

5

2

46

Charges against reserve and currency

(81

)

(2

)

(2

)

(85

)

Balance June 30, 2012

$

74

$

10

$

—

$

84

_____________________________

(1)

Represents net amount recognized within the Condensed Consolidated Statements of Income for the period shown.

(2)

Charges associated with asset impairments represent the write-down of the related assets to their new cost basis and are recorded concurrently with the recognition of the provision.

Reconciliation to the Condensed Consolidated Statements of Cash Flows:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Charges against reserve

$

(46

)

$

(67

)

$

(85

)

$

(120

)

Asset impairment

—

—

2

—

Effects of foreign currency and other non-cash items

2

4

—

—

Cash Payments for Restructurings

$

(44

)

$

(63

)

$

(83

)

$

(120

)

The following table summarizes the total amount of costs incurred in connection with these restructuring programs by segment:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Services

$

16

$

1

$

19

$

—

Technology

12

(7

)

$

29

$

(19

)

Other

1

(3

)

(2

)

(5

)

Total Net Restructuring Charges

$

29

$

(9

)

$

46

$

(24

)

Note 9 – Debt

Debt Exchange

In February 2012, we completed an exchange of our 5.71% Zero Coupon Notes due 2023 with an accreted book value at the date of the exchange of $303, for $362 of our 4.50% Senior Notes due 2021. Accordingly, this increased the principal amount for our 4.50% Senior Notes due 2021 from $700 to $1,062. The exchange was conducted to retire high-interest, long-dated debt in a favorable interest rate environment. The debt exchange was accounted for as a non-revolving debt modification and, therefore, it did not result in any gain or loss. The difference between the book value of our Zero Coupon Notes and the principal value of the Senior Notes issued in exchange will be accreted over the remaining term of the Senior Notes. Upfront fees paid to third parties in connection with the exchange were not material and were expensed as incurred.

Senior Notes

In March 2012, we issued $600 of Floating Rate Senior Notes due 2013 (the “2013 Floating Rate Notes”) and $500 of 2.95% Senior Notes due 2017 (the “2017 Senior Notes”). The 2013 Floating Rate Notes were issued at par and the 2017 Senior Notes were issued at 99.875% of par, resulting in aggregate net proceeds for both notes of approximately $1,093. The 2013 Floating Rate Notes accrue interest at a rate per annum, reset quarterly, equal to the three-month LIBOR plus 1.400% and are payable quarterly. The 2017 Senior Notes accrue interest at a rate of 2.95% per annum and are payable semi-annually. As a result of the discount, they have a weighted average

Xerox 2012 Form 10-Q

15

effective interest rate of 2.977%. In connection with the issuance of these Senior Notes, debt issuance costs of $6 were deferred. This debt issuance partially pre-funded the May 2012 maturity of our $1,100 of 5.59% Senior Notes.

Interest Expense and Income

Interest expense and interest income were as follows:

Three Months EndedJune 30,

Six Months EndedJune 30,

2012

2011

2012

2011

Interest expense(1)

$

109

$

124

$

218

$

251

Interest income(2)

147

168

298

337

____________________________

(1)

Includes Equipment financing interest, as well as non-financing interest expense that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

(2)

Includes Finance income, as well as other interest income that is included in Other expenses, net in the Condensed Consolidated Statements of Income.

Net (Payments) Proceeds on Debt

Net proceeds on debt as shown on the Condensed Consolidated Statements of Cash Flows was as follows:

Six Months EndedJune 30,

2012

2011

Net proceeds (payments) on short-term debt

$

550

$

(297

)

Net proceeds from issuance of long-term debt

1,105

1,018

Net payments on long-term debt

(1,112

)

(18

)

Net Proceeds on Debt

$

543

$

703

Note 10 – Financial Instruments

Interest Rate Risk Management

We use interest rate swap agreements to manage our interest rate exposure and to achieve a desired proportion of variable and fixed rate debt. These derivatives may be designated as fair value hedges or cash flow hedges depending on the nature of the risk being hedged.

Fair Value Hedges

At June 30, 2012 and December 31, 2011, we did not have any interest rate swaps outstanding.

Foreign Exchange Risk Management

We are a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of our business. As a part of our foreign exchange risk management strategy, we use derivative instruments, primarily forward contracts and purchase option contracts, to hedge the following foreign currency exposures, thereby reducing volatility of earnings or protecting fair values of assets and liabilities:

•

Foreign currency-denominated assets and liabilities

•

Forecasted purchases and sales in foreign currency

Summary of Foreign Exchange Hedging Positions

At June 30, 2012, we had outstanding forward exchange and purchased option contracts with gross notional values of $2,823, which is reflective of the amounts that are normally outstanding at any point during the year. Approximately 81% of these contracts mature within three months, 11% in three to six months and 8% in six to twelve months.

The following is a summary of the primary hedging positions and corresponding fair values as of June 30, 2012: